United States District Court, D. New Hampshire
GT Advanced Technologies Inc., et al. Appellants,
William K. Harrington, United States Trustee Appellee.
ORDER Opinion No. 2015 DNH 144
LANDYA McCAFFERTY, District Judge.
Chapter 11 debtor GT Advanced Technologies, Inc. and its affiliated debtors and debtors in possession (collectively "GTAT") appeal a February 5, 2015 order of the bankruptcy court (Boroff, J.) denying their motion for approval of a proposed key employee retention plan and a proposed key employee incentive plan. Appellee William Harrington is the United States Trustee ("Trustee"). This court heard oral argument on GTAT's appeal on July 10, 2015. For the reasons that follow, this matter is remanded to the bankruptcy court for further proceedings.
I. Standard of Review
This court has jurisdiction over GTAT's appeal pursuant to 28 U.S.C. § 158(a). "The bankruptcy court's legal conclusions engender de novo review, but its factual findings are examined only for clear error." Redondo Constr. Corp. v. P.R. Highway & Transp. Auth. (In re Redondo Constr. Corp.), 678 F.3d 115, 120-21 (1st Cir. 2012) (citing Donarumo v. Furlong (In re Furlong), 660 F.3d 81, 86 (1st Cir. 2011)).
Until 2014, the Federal Rules of Bankruptcy Procedure ("Federal Rules") provided that a district court reviewing an appeal from a decision of the bankruptcy court was "authorized to affirm, modify, or reverse a bankruptcy judge's [order] or remand with instructions for further proceedings.'" Quinn v. Quinn, 528 B.R. 203, 205 (D. Mass. 2015) (quoting Fed.R.Bankr.P. 8013). The 2014 revisions to the Federal Rules eliminated the provision cited in Quinn. See 10 Collier on Bankruptcy ¶ 8000.01, at 8000-3 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Even so, the court has no reason to believe that its tools for disposing of bankruptcy appeals are any different from those described in the pre-2014 iteration of Rule 8013.
GTAT is a technology company that once produced sapphire glass. As a result of a cash liquidity crisis arising from its sapphire glass manufacturing operation, GTAT petitioned for protection under Chapter 11 of the Bankruptcy Code. At the time, it had assets of over one billion dollars. Shortly after filing its petition, GTAT suffered losses of more than 300 million dollars and laid off 820 employees, nearly 70 percent of its workforce. In addition to implementing layoffs, GTAT lost another 43 employees to voluntary attrition between the time it filed its bankruptcy petition and the date of the bankruptcy court's hearing on its motion for approval of the proposed incentive and retention plans. Among the key points of GTAT's plan for reorganization are: (1) shifting away from the manufacture of sapphire glass; (2) selling the furnaces it had previously used to manufacture sapphire glass at a facility in Mesa, Arizona; and (3) developing and manufacturing new products in the solar industry through two projects named "Merlin" and "Hyperion."
Less than three months after filing for bankruptcy protection, GTAT moved the bankruptcy court to approve: (1) a key employee incentive plan ("KEIP") that would provide bonuses for nine insiders; and (2) a key employee retention plan ("KERP") that would provide bonuses for about two dozen non-insider employees. The final versions of the KEIP and the KERP were developed on the basis of extensive negotiations with the Creditors' Committee.
The proposed KEIP covers nine senior management employees. The amount of any employee's bonus under the KEIP is based upon his or her performance in five specific areas. The operative metrics are: (1) maximizing the value received for GTAT's used furnaces; (2) reducing "cash operating expense run-rate, " Appellants' Br. (doc. no. 17) 9; Appellee's Br. (doc. no. 22) 7; (3) maximizing the value received for assets from the Mesa facility other than furnaces; (4) advancing the Merlin project; and (5) minimizing the costs of deinstalling furnaces at the Mesa facility. Performance in each of those five metrics is measured on a scale that runs from "threshold" through "target" to "stretch." An individual who meets the "target" standard in each of the five metrics would receive a bonus of between 19 percent and 83 percent of his or her base salary. The total cost of the KEIP runs from $1, 137, 500, if each insider meets the "threshold" standard in each of the five metrics, to $3, 370, 000, if each insider meets the "stretch" standard in each of the five metrics.
The proposed KERP covers 26 employees. The retention bonuses in the KERP are to be paid to employees who remain with GTAT until the earlier of its emergence from bankruptcy or a sale of substantially all of its assets. The bonuses range from eight percent to 48 percent of an employee's base salary, and the KERP also provides for discretionary disbursements by GTAT's chief executive officer, up to a total of $300, 000, with no more than $50, 000 going to any individual KERP participant. If all the proposed bonuses are paid, the KERP will cost GTAT $1, 250, 000.
The bankruptcy court held a hearing on GTAT's motion for approval of its KEIP and KERP. Only two objections were filed, one by the Trustee and one by a shareholder. At the hearing, the bankruptcy court heard testimony from: Andrew Pfeifer and Brian Cumberland,  and had before it declarations from those two witnesses as well as declarations from Neil Augustine and Richard Newsted. At the conclusion of the hearing, the court ruled from the bench. With regard to the KEIP, Judge Boroff had this to say:
I have before me the KEIP and the KERP. I listened very closely to the testimony of Mr. Pfeifer and Mr. Cumberland, Mr. Augustine and Mr. Newsted, as well as the impressive work that was done by them and by the Creditors' Committee, its professionals and counsel for the debtor in order to fashion something that they thought might work.
Nevertheless, what I heard every time I inquired with respect to the KEIP was how problematic it would be if the executive team - I think at one point it was referred to as Mr. Gutierrez and his lieutenants - left the company. It was critical to retain them.
Well, in the absence of a statutory prohibition I could be persuaded to go along with that, but Congress has spoken very clearly on retention agreements [for insiders]. This is a disguised retention agreement. I do not believe that Mr. Gutierrez or his so-called lieutenants are going to work any less diligently if I don't approve the agreement or any more diligently if I do approve the KEIP agreement. They will leave the company or stay with the company based on their expectation that the company will survive and how well it will do in its reorganized form.
Retention agreements [for insiders], Mr. Despins said at the outset, have been made extraordinarily difficult - he might have said impossible and I might agree with him - by Section 503(c) of the Bankruptcy Code and the elements of 503(c)(1)... have simply not been met and so I cannot approve the KEIP agreement.
J.A. (doc. no. 18), at JA-000918-000919. Judge Boroff also declined to approve the KERP:
With respect to the KERP plan, those are individuals who have a very difficult decision to make. They need to decide whether they will stay with the company or not. To stay with the company means that they are investing in the company's success and if they decide to leave, then the amount of money that's being offered to them is dramatically lower than the risk that they're trying to avoid. If, in fact, they think that the company will fail - and I've every expectation that they're still there because they anticipated success - but if they change their mind[s] and decide that the company may fail and they get themselves another job offer, then it seems ...